MCI-WorldCom merger questioned

Facing growing concern from government and industry, MCI and WorldCom are searching for ways to win approval for their $37 billion merger.

May 20, 19985:50 PM PDT

Facing growing concern from a broad range of government and industry
players over its proposed acquisition by WorldCom, MCI Communications is searching for ways to get approval for the $37 billion deal.

As widely reported, MCI is soliciting offers for its wholesale Internet business in an attempt to assuage concerns that its merger with WorldCom would result in a single company that would route up to 70 percent of the traffic over the Net.

MCI spokesman Jim Monroe said the company is working to address regulators' concerns but declined to discuss whether its Internet business is up for sale. A WorldCom spokeswoman declined to comment.

The companies' reticence about their plans did not stop others from publicly commenting on them. Responding to a reporter's question at the company's annual shareholder meeting, AT&T chairman and chief executive C. Michael Armstrong said he'd be "very interested" in talking with MCI about the deal, according to Dow Jones. An AT&T spokesman had no further comment.

Other industry players and observers gave mixed reactions to the reports that MCI might spin off its Internet business. Jim Crowe, chairman for network startup Level 3 Communications, said he would be skeptical of such an arrangement.

"It's of interest to maybe six or eight providers, not to the 3,995 other Internet service providers who are not members of the club today, who have to peer on terms that are discriminatory and use connections that are inferior," Crowe said. He added that WorldCom and MCI recently refused to interconnect, or "peer," their networks with Level 3 and that MCI's divestiture would do little to change that.

He said regulators should stop focusing on network providers' market share and instead look at establishing guidelines for equal access. "We think the merger is a unique opportunity to asked the entities to enter into a consent decree that simply says that qualified competitors ought to have the right to connect with each other on terms that are non-discriminatory,"
he said. "What we think would be terrible is if the industry is unable to come to an agreement and the government steps in."

After peering negotiations among MCI, WorldCom and Level 3 broke down, Crowe retained the litigation boutique founded by David Boies to represent it in U.S. and European meetings. A high-profile attorney who successfully defended IBM in a protracted antitrust fight against the government, Boies
was one of the architects of the action the Justice Department brought against Microsoft on Monday.

Despite Crowe's skepticism, Abhi Chaki, an analyst at Jupiter Communications, said a divestiture of MCI's wholesale Internet business would go a long way to addressing regulators' concerns. MCI's divestiture would "significantly lower their dominance of Internet traffic that traverses over their respective backbones," he said.

Chaki added that MCI would likely be reluctant to sell its business to AT&T because it is a direct competitor. More likely candidates would be smaller telecommunications and telephony companies, he added.

European Commission competition commissioner Karel Van Miert also weighed in on the proposed merger, telling Bloomberg today the
companies appeared "prepared" to offer "proper remedies" to address antitrust concerns. There were no details about exactly what concessions the companies might make.